April 4, 2003
Jonathan G. Katz, Secretary
RE: File No. S7-45-02; 33-8186; Comments on Implementation of
Dear Mr. Katz:
OppenheimerFunds, Inc. submits these comments on the most recent proposal by the Securities and Exchange Commission (the "Commission") to establish standards of professional conduct for attorneys who appear and practice before the Commission in the representation of issuers, as called for by Section 307 of the Sarbanes-Oxley Act of 2002 (the "Act"). The Commission adopted rules establishing an "up the ladder" reporting system within an issuer. In a companion release, cited above, the Commission solicited additional comments on requirements that may be imposed when an attorney, after reporting evidence of a material violation "up the ladder" within an issuer, reasonably believes that the issuer has made no response or has not made an appropriate response.
These comments focus on how the "noisy withdrawal" aspects of this proposal affects attorneys who are employed by an investment adviser and who represent investment companies ("mutual funds") before the Commission in the course of that employment. OppenheimerFunds, Inc. is the investment manager for the more than 60 investment companies comprising the Oppenheimer family of mutual funds, which have more than $120 billion in assets and more than 7 million shareholder accounts. OppenheimerFunds, Inc. employs nine attorneys, a portion of whose responsibilities include preparing, reviewing, or supervising the preparation and review of the registration statements and other documents filed with the Commission on behalf of the Oppenheimer funds. In summary, our comments are as follows:
A. Treatment of Investment Adviser Attorneys as "In-House" Attorneys.
Under the "noisy withdrawal" provisions of the Commission's proposal, if an outside attorney retained by the issuer, after reporting "up the ladder" within the issuer, reasonably believes the issuer has made no response or has not made an appropriate response, that attorney is required to withdraw from representing the issuer, An in-house attorney employed by the issuer, under the same circumstances, is not required to resign from his or her position.
We stated our view in a previous comment letter to the Commission (as did others) that an attorney employed by an investment adviser does not jointly represent the adviser and the investment companies managed by that adviser. Assuming the Commission does not share that view, we believe that for these purposes, an attorney employed by an investment adviser should be considered an in-house attorney rather than an outside attorney of the investment company. The proposal recognizes that neither the Act nor the Commission's standards of professional conduct are intended to require in-house attorneys either to resign from their positions of employment or refuse their job responsibilities. There is no compelling logic and considerable detriment to treating attorneys employed by an investment adviser differently in this respect than other in-house attorneys, on the basis that a portion of their job responsibilities include providing legal services to investment companies managed by their employer.
B. "Noisy Withdrawal" Provision Alternatives
Under the alternative proposal to the "noisy withdrawal" provisions, the issuer, rather than the attorney, would be required to report to the Commission an attorney's notice of withdrawal or failure to receive an appropriate response, We believe that the alternative proposal is preferable to the "noisy withdrawal" provisions because, at least on its face, it avoids direct conflict with the attorney's duties of confidentiality and privilege. If the Commission, however, determines to adopt the alternative proposal, several changes should be made to that proposal to facilitate compliance with the rule.
1. Determination by Committee of Independent Directors
The Commission requested comments on whether an issuer should not be required under the rule to disclose an attorney's written notice where a committee of independent directors of the issuer's board determines, based on the advice of counsel that was not involved in the matters underlying the reported material violation, (i) that the attorney providing the written notice acted unreasonably in providing the notice, or (ii) that the issuer has, subsequent to the written notice, implemented an appropriate response.
We support allowing such a determination by a committee of independent directors. This provision would alleviate concerns that a single attorney would be able to compel an issuer to publicly disclose a report of a material violation in instances where disclosure is not warranted, either because a material violation never occurred or the issuer's response may reasonably be deemed to be appropriate or timely. In addition, the approach is consistent with the Investment Company Act and other rules, which already require fund advisers to regularly report information to fund boards under a governance structure that empowers directors, including independent directors, to protect fund shareholders.
We recommend that several changes and clarifications be made to this provision. First, the Commission should revise the standard under which the committee would have to make its determination. The committee should be required to determine whether there is substantial evidence of a material violation that is ongoing or is about to occur and is likely to cause substantial injury to the financial interest or property of the issuer or of investors (the same determination that an attorney would have to make prior to making a "noisy withdrawal") rather than whether the attorney acted unreasonably in providing notice of the material violation. Under the proposed standard, there may be instances when the committee could be compelled to determine that an attorney acted "reasonably" in reporting what he believed to be a material violation in a situation where in fact no material violation actually occurred. Disclosure by the issuer should not be required in situations where there was either no violation of law and/or no injury. There should be a disclosable event only where the committee concurs that there was substantial evidence of a material violation and a likelihood of injury and no appropriate remedy was implemented. We also recommend that the rule permit, rather than require, the committee of independent directors to obtain the advice of counsel in making their determination under this provision. The determination to seek advise of counsel, of other experts (such as accounting or tax experts) or to not seek advise from any third party, should be made by that committee, exercising its business judgment, in light of the issues presented.
2. Filing Requirements for Investment Companies
The proposal would require an issuer that has received notice from an attorney to notify the Commission on Form 8-K within two business days of receiving the notice. Creating a new form specifically for investment companies would be more appropriate and less confusing for investment companies in meeting their disclosure obligations under the rule.
In addition, we believe that two business days after receiving notice form an attorney is not an appropriate amount of time in which to require issuers to make the necessary filing under the rule. Two days is an insufficient time within which reasonably to expect the independent directors and their counsel to operate. A fixed two-day period of time does not provide the necessary flexibility to investigate claims presented in the notice or implement an appropriate response, such as initiating any corrective measures. We recommend that an issuer be required to notify the Commission "promptly" after receipt of an attorney's written notice.
OppenheimerFunds, Inc. appreciates the opportunity to provide these comments in response to the Commission's Proposing Release. If you have any questions concerning these comments or would like additional information, please contact the undersigned.
cc: Robert G. Zack, Esq.
Boards of Directors/Trustees of the Oppenheimer Funds